TMFDeej (99.04)

Others agree that the stimulus package won't work

8

When I first heard that the government was working on a comprehensive stimulus package to help pull the U.S. out of one of its worst recessions ever, I was hopeful that Washington would be able to help. Oh boy, I should have known better. I have blogged numerous times over the past month that the stimulus package, in its current form, will be very, very ineffective at preventing the U.S. economy from falling deeper into recession.

The package still contains a lot of pork, it contains only tiny one-time tax credits, it doesn't contain enough spending on infrastructure and many of the useful projects that it does contain won't start for years, it does nothing to lower mortgage rates, I could go on and on. Scroll back through some of my previous posts for more.

You can reply all you want about how Obama did the best that he could given the circumstances and that the package isn't bad. Hogwash. I could have come up with a better package in a couple of hours right here on my laptop in my pajamas. Washington hasn't changed one bit, yet.

I am so down on the bill and (Geithner's banking solution) that I did something that I almost never do in CAPS last week. I opened up a number of positions in ultrashorts (I could only fit four or five given my huge portfolio and the 200 pick cap). I even sold more of my economically sensitive dividend-paying common stock in real life and switched some of the funds to bonds. I have almost no doubt that we will seriously re-test and probably breach the market lows that we saw last year.

The consensus estimate is now that the U.S. GDP will drop by 2% in 2009. This is half a percentage point higher than what economists were forecasting last month. Even with the passage of the stimulus plan, economists are still predicting that the unemployment will surpass 8% through 2010 (I still personally believe that the watered down measure of unemployment that is reported by the BLS will hit low double digits before we're all said and done).

Economists are now estimating that there is only a 53% chance that the United States will escape this recession at some point in the next twelve months (down from an estimate of 55% last month). I personally believe that things won't stabilize until some time in 2010 and that recovery will be very slow.

Both parties, the Republicans and Democrats, in Congress and the Senate are a bunch of stooges. The only way for the government to pull us out of this mess now that an ineffective stimulus package has been created would be to intervene in a massive way and lower mortgage rates to 4% - putting a temporary floor under housing and more money into consumers' pockets, or to print so much money that the value of the dollar falls - making what little we export here in the U.S. more attractive to foreign countries and creating inflation that would prop up asset prices.

I am not necessarily advocating these things, both of these would likely either be either temporary fixes or have terrible side effects, but in my opinion now that the stimulus package can't be changed they are the only options left that will work.

The stimulus seems backward to me. Bailout the banks of their toxic assests . Give then cash for their balance sheets. All this to encourage the banks to lend to businesses. Why would businesses borrow to expand their operations if consumers are keeping their wallets clamped firmly shut? Now if cash was given to consumers through some mechanism (i.e. substantial tax cuts or even, perhaps, a shot of cash) the new found greenbacks would surely be spent. This would create demand for goods and services. Businesses would feel the need to expand to meet demand and fill new niches in existing markets.

I was on track to expand my business drastically. All the ducks where in a row. All that remained was to find real estate. Then the bottom fell out. I haven't signed a single contract in 9 weeks. If the ghost of Hank Paulson showed up at my door with two newly-minted pennies on a velvet pillow I wouldn't borrow them no matter the interest rate. It seems the demand must be created before the supply is expanded.

At any rate I firmly believe the rash of knee-jerk "bailouts" or whatever one chooses to call them will go down as the most blatant fleecing of the American people in history. With the huge bonuses and company buyouts by the banks with taxpayer money the good times keep rollin' for some Wall Steet execs. There will be more pain for the general public when the time to pay the piper for this misguided money comes 'round.

Deej, I take issue with the "The only way for the government to pull us out of this mess [...] lower mortgage rates to 4% - putting a temporary floor under housing and more money into consumers' pockets"

It wouldn't work. For many reasons:

1)The government can't set mortgages rates. The market does. Having the government try to mess with who gets a mortgage got you guys in this mess in the first place. In any case, it is the same as subsidizing housing, which also helped get you in this mess. It is also incredibly unfair to those who recognized that prices were too high and decided to rent while waiting for prices to go down to an acceptable level. Finally, subsidizing housing through interest rates will help the banks a lot more than it'll help the average american.

2)One thruth about the US housing market is that house are still too expensive. Wheter you consider Price/Rent, Price/income, or almost any other metric, prices are too high. Prices need to come down. Badly. The only way prices will stop dropping is when they'll be low enough.

3)Too many house/condos were built during the housing boom. There is a housing glut. So even if prices come down and interest rates stay low, there isn't much economic reason to build more houses. So even if the government somehow managed to lower interest rates, it doesn't mean housing starts would rise much, so no jobs would be created in housing.

4)Do you really think forcing consumers to start using their houses as atm machines again is the way to go? It isn't. Chinese-built plasma tv will only do so much for the US economy you know.

Hey Byrne. Thanks for reading. I didn't say that it was a perfect solution or the right thing to do...just that it would be more effective in stimulating consumer spending and proping up home prices than what the government is going now.

You can't honestly tell me that if Uncle Sam really wanted to they couldn't get mortgge rates down to 4%. The Fed could buy Treasuries like they were going out of style. Evenyone would move out of the way of that freight train pretty darn fast.

The government could even get Fannie and Freddie (which were essentially nationalized) in on the act.

I am not necessarily in favor of massive intervention like this, but instead am suggesting an alternative that wouldn't cost any more money than that was already spent on TARP, TALF, stimulus, etc... yet would likely be much more effective.

I was not looking for additional homes to be built. There are too many already. What the stabilization of asset prices and lowering of mortgage payments would do is prop up all of the toxic assets on bank balance sheets that are tied to housing. Thus keeping the banks from constantly needing more money.

At the same time increased consumer spending would at least slow the job losses that we have been seeing.

If one put the brakes on the rapidly deteriorating economy, they could then work on long-term solutions to our problems like encouraging domescit manufacturing, a switch to domestic fuel sources, better education for our children, better mass transit, a smarter power grid. These things are very necessary, but they take time. Fix our short term problems ASAP with lower mortgage rates and then move on to fixing what's really wrong with America.